Category Archives: LBO

It is a common occurrence to hear of private equity buyouts these days. While some would like to place it entirely in a negative light, it can be beneficial for the business. Private Equity Firms such as Effi Enterprises may perform these types of financial activities to help recreate the business. There was a large number of leveraged buyouts (LBOs) that occurred in the 80s. It’s interesting to find out what triggered all of these buyouts and what the influencing factors were for their beginning and why they ended. It is also interesting to know the happenings after the companies were purchased. And what about the buyout firms; did firms like Effi Enterprises make any money?

At the very peak of the 1980s leveraged buyouts was Kohlberg Kravis Roberts’ purchase of RJR Nabisco. This buyout became the subject of a book written by two Wall Street Journal reporters, “Barbarians at the Gate.” It became a #1 bestseller in the New York Times. Later it was made into an HBO movie and was called by the same name.

The movie, Barbarians at the Gate retells the events that occurred during the largest leveraged buyout ever. James Garner plays RJR Nabisco’s Chief Executive Officer, F. Ross Johnson who is trying to buy out his own company. Much of the movie surrounds the power struggle between a Wall Street investment banker Henry Kravis and Johnson. Kravis wants to make Johnson take Nabisco over on his own.

It is a story of betrayal, high stakes and power struggles but told with great flair. It is well balanced with some lightheartedness and even playful tones at times. The movie gives us the chance to see a very different point of view of the behind the scenes goings on of leveraged buyouts. Rather than viewing these types of high profile financial transactions as an outsider with little understanding to what is actually going on in the company Barbarians at the Gate allows us to see it from the perspective of an insider. And in this case not just someone inside the company, but the man who sits at the top, the CEO.

It is sprinkled with dry humor, quite a bit of tension and subtlety. It’s a general look at a huge corporate game in which the losers all get $23 million – after taxes of course. The pace of the movie is great and this picks up nicely closer to the end of the movie as the story is building up to the climax. As the characters are all rushing around the audience is caught up in the energy of the moment, whether you already know how the story ends or not.

Screenwriter Larry Gelbart does an exceptional job of making F. Ross Johnson the protagonist. This is a difficult thing to do since he is a rich man who is deviously trying to get ahead of the game, this type of financial slight of hand that is despised by most. Mr. Gelbart is able to make Johnson into a rather likeable character in spite of his dealings. Of course he is made out to be someone who cares immensely for the company and the people and less for the money to be made. And Garner does a great job at playing a character which is mixed with humanity, greed, incompetence and good-naturedness. Kravis, played by Jonathan Pryce makes him out as more of a villain.

These were some very strong and captivating performances which opened up the world of F. Ross Johnson making it visible to the public eye. His morals are very much what is expected from the super wealthy are warped and the movie has several scenes which play this out nicely. The movie does a great job of presenting how he manages and even mismanages the buyout. It’s a high stakes game played between Kravis and Johnson and has all the drama that entails. And even though the vast majority despises such things as financial fakery that ends up with literally thousands of jobs lost, Barbarians at the Gate shares a perspective that is nothing less than thought provoking and entertaining.

There is a vast difference between vulture capital and private equity. But before the details are given we should look at a brief explanation of vulture capital. The term vulture capital is a slang term that is related to venture capital only in a negative connotation. Venture capital is a form of funding for businesses and especially an entrepreneur. When a business is just getting started a company such as Effi Enterprises will become a funding source so that the business has a greater chance of growing. Usually this is in exchange for a percentage of the company’s profits. The term vulture capital is when funds are placed into a business for the purpose of slowly squeezing the life out of the business. A vulture capitalist will have a primary goal of eventually forcing the company out of business and then selling it for a profit. In pre-Reagan days this was called a leveraged buy outs. However, recently some have tried to say that private equity and vulture capital are the same thing.

Different Investment Purposes

Private equity is an investment into a company. Generally, this investment is done through a private equity firm, an angel investor or a venture capital firm. No matter what category the investment falls into, each company will have its own investment strategies, preferences and ways of setting goals. The main purpose is to provide the funds to help the targeted company continue with expansions, develop new products or they may be used to entirely restructure the company’s management or operation.

Some say that private equity is “no better” than the leveraged buyout. However, in a leveraged buyout the vulture capitalist will buy majority control of a firm or business. Usually an investment in made into a business via angel investors or venture capital firms, not for gaining any control, but for the opportunity of investing in emerging companies or entrepreneurship. They will invest in a company, help get it established and up on its feet in exchange for a portion of its profits further down the road.

Profitability Goals

Private equity and vulture capital are both ways to pour funding into a business. The main difference is that private equity (and real venture capital) will also be willing to pour time and expertise into the company to help it succeed and grow; whereas the vulture capitalist will have the goal of purchasing the majority of the controlling shares in a company for the purpose of liquidation. They both are looking for a profitable return down the road. However, the private equity firm will obtain their profits from helping get the business established until there is a solid profitability from which they can draw. The vulture capitalist is looking to profit from the yields of a liquidated business which is going under. Most investors are looking to put money into a company like “seed” money in hopes that the company will benefit from the investment and be able to work to provide long lasting profits. Vulture capitalists will try to squeeze everything out of a business and the efforts are not at all aimed at the success of a business; but rather at gaining from the loss. Many Vulture capitalists will actually force businesses to go further into debt or incur new loans until their only choice is to file bankruptcy. At this time the Vulture capitalist will profit from the forced liquidation.

Are they Necessary?

In the real business world there is a place for both the private investor and the true Vulture capitalist. Each one of them can play a major role that helps strengthen the economy. Vulture capitalist can have a positive effect if they give a failing business a way to get out gracefully.

There are many different types of venture capital firms and a plethora of funding sources for businesses which are in trouble, or for one which is just getting started. Effi Enterprises helps emerging companies and those who are involved in trying to establish entrepreneurship find funding sources. These funds are provided for a business along with some expertise and counsel to help the company become better established. Usually, venture capital is a type of private investing where money is given to the company in return for stock. These “seed” funds are planted in the business in the hope that the business will be profitable down the road at which time the initial investor will reap the benefit of the profits. One way of looking at it is that it is a long term commitment with financial backing to ensure the success and profitability of a new company.

Vulture Investing and Leveraged Buyouts

In the 80’s there was a term used a lot in the financial realm, “leveraged buyout.” The new term for this is “vulture capital.” Rather than seeding money into a business that has high growth potential, a company purchases the controlling shares from a company so that they have the leverage. Generally the intent is not to help the company be profitable, but rather to profit from the liquidation of the company’s assets.

There are not always negative connotations. Vulture capitalism is the practice of purchasing distressed assets from a company. This means the company is likely to die, is in trouble or in danger of bankruptcy. Many times the “vulture” will believe that there is at least some redeemable value in the company and therefore will invest in the company and either try to liquidate it before it hits the bankruptcy stage. Many see this as a great benefit to the economy while others see the vulture as the “bad guy.”

Bad guy or good deal?

Public and private investing occurs on many different levels in the business world. Every business understands that some will be profitable and some will not. With any investment there is always a huge risk involved, even for the vulture capitalist. Usually, they purchase an offer because it is very low and many times there simply are not any other takers. But this does not always mean that they are predatory in nature. It is very common for people to purchase foreclosed homes, when the current owner was not able to manage the asset and no other buyers are obtainable. Who knows if the vulture is even getting a good deal or not? They may get stuck with a purchase that they are unable to unload onto someone else down the road.

Vulture vs. Venture

Vulture and Venture capital are both funds that are poured into a business. The intended outcome is the main difference. Most VC firms will put action and counsel behind their invested finances to ensure the company’s success and profitability. Usually this type of investor receives a large piece of equity or control in the business so that they can help change things around if the business starts to suffer. Typically, the vulture investor is already planning on selling the company and liquidating as many of the assets as possible. They may invest some time in trying to establish more value in the assets before selling it off, but typically this is the goal when the investment is made. There is no doubt that no matter what type of investment is contributed, the intended goal is profits for everyone involved. The biggest difference here is how the final goals are achieved.